Yesterday, I wrote a post about my withdrawal strategies and there were some comments about Roth IRA conversions that have me reconsidering my strategy:
I had mentioned that one of my goals was to draw down 401(k) accounts before age 72 to reduce the hit from Required Minimum Withdrawals. I had planned to start doing this at age 59.5 when Mindy and I become eligible for withdrawals.
However, I could start converting to a Roth at any time; no need to wait until age 59.5. Since the converted money is taxed as ordinary income, I would wait until Mindy quits work to reduce our tax burden. Here is my new strategy, changes in yellow:
- Retirement to 59.5: Convert some 401(k) money to a Roth IRA every year. Withdraw money from post-tax accounts or principal from older Roth IRAs to live on.
- 59.5 to 72: Continue to withdraw from 401(k)s to minimize RMD hit.
- 72+: Live off of RMDs. Supplement with Roth and post-tax accounts as needed. Yell at children on the lawn.
- Kick the bucket: Leave a little to the kids and a lot to worthy causes.
I like this strategy a lot. If Mindy quits work at the age of 48, we have 24 years before RMDs kick in. We could draw down a lot of 401(k) money in 24 years.
Roth conversions are also insurance against tax hikes. The US is going to have to raise taxes. Once I convert my 401(k), I’ve locked in future gains and protected myself from higher taxes.
I didn’t write about what we’re going to do for health care because I don’t know. Our plan had been the ACA, but that may pass with RBG. We’d consider a health care sharing organization or maybe a direct primay care plan.
Before you sound the alarm bells:
Know that I just don’t know right now, but I do know that I’ll consider catastrophic health issues in our plans. Health care is hard. The American system doesn’t work well and I don’t have answers. I’ll evaluate the options when the time comes.
One option which we’ve been thinking about lately is moving to a country with a more reasonable health care system. Health care isn’t the primary motivation for a move like this, just a happy side benefit.
One More Thing: College!
We didn’t like the college savings plan that Colorado offered, so we didn’t sign up for it. We plan to help the girls, but I also want them to have skin in the game.
I paid for my own school through loans and I appreciated the hell out of the college experience. Knowing that I was paying for it made me choose a major wisely (“I’m going to have to pay these loans back when I’m done!”) and made me study hard. Magna Cum Laude baby!
But, I don’t want my children saddled down with tons of debt either. So, I may have them take out loans and then swoop in at the end and pay them off. We’re still figuring it out and some of the decisions will depend on how much money we have when the girls reach college age. If we’re doing really well, maybe we’ll throw in a car too.
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